A Little Less Funny Business in Lending

During the go-go days of lending in California (and Nevada, and Florida, and...), people who could prove they had a pulse were hired as mortgage brokers or loan officers.

They made loans to other people who could prove they had a pulse, even if they didn't need to prove income.

It did not turn out well.

Now, as of this last weekend, two years after the federal government passed the SAFE Act, many mortgage brokers and lenders have to be licensed.

Not all of them.

More than a dozen states had a July 31st deadline for brokers to either be licensed, or take the test necessary to get a license. Applicants also need to pass a criminal background check. This is completely new in California, the epicenter of crazy lending. However, a license eventually will be needed for every state in which you want to make loans, which conceivably means that some people may need to take 50 different tests (and pay the fee!), plus a national test. After being licensed, brokers must prove annually that they've had eight hours of continuing education, and they may also need to prove they have not been sanctioned in any state.

Good, right?

Here's the catch. Loan officers at federally chartered banks are exempt from getting a license. So while independent brokers and non-bank lenders have to spend weeks or months paying for test prep courses and then taking tests, people making loans at, say, Bank of America or Wells Fargo do not.

Many states have been so inundated with requests for testing that they are extending the deadline. American Banker reportsthat New Jersey and South Carolina have pushed back to Halloween the requirement to have a license. Five states, including hard hit Florida and Nevada, have extended the deadline to the end of the year.

"Seems like we're running a university the last few months instead of running a mortgage company," he tells me.

Hsieh, a pioneer in online lending, now runs a company called loanDepot.com.

He has 120 employees making loans who now have to be licensed if they're going to do any lending. There is about a 30 percent failure rate first time out taking the test. All of these "back flips", as Hsieh calls them, are meant to protect consumers. He agrees that's a good thing long term. But he also warns that if someone fails the test to get a license, that person will probably end up working for a bank. The SAFE Act "tries to protect the consumer from less sharks in the water," he says, "but they're just swimming around to the other pond."

In this first clip is more from Hsieh, along with loanDepot's chief counsel Peter Macdonald. My first question about this new world order in lending: "Is it fair?"

Not all brokers are unhappy.

Fred Arnold

Independent broker Fred Arnold, a branch manager for American Family Funding in northern Los Angeles County, discusses the need for a licensing system for lenders with CNBC's Jane Wells

"Most of the bad actors are out of the industry, but what's going to prevent them from coming back into the industry?" asks independent broker Fred Arnold, a branch manager for American Family Funding in northern Los Angeles County.

"We need to have some type of licensing system." He says getting licensed cost him over $300, but he plans to use his new certification as a marketing tool.

In this second clip is more of my interview with Arnold, who explains that lenders are now controlled by a legion of regulators, with some fees being passed on to consumers. However, he sees the SAFE Act as a positive development, even if big bank loan officers don't have to go through the same process he did.